Ally Financial IPO is a taxpayer win, but don't buy the stock

Ally is going public so it can pay back the government for its bailout. That's good news. But the auto lender's stock is risky.

The opinions expressed in this commentary are solely those of Paul R. La Monica. Other than Time Warner, the parent of CNNMoney, Abbott Laboratories and AbbVie, La Monica does not own positions in any individual stocks.

The government is about to sell a big stake in Ally Financial, the auto loan giant formerly known as GMAC, through an initial public offering. It's a victory for taxpayers who had to bail the company out at the height of the financial crisis.

But what about investors? Should you buy shares of Ally when it starts trading on the NYSE later this week under the ticker symbol ALLY (ALLY)?

Absolutely not.

Ally received $17.2 billion in bailout funds from the government's controversial Troubled Asset Relief Program (TARP).

Don't get me wrong, it's good news that the Treasury Department is unloading part of its Ally investment. Based on the $26.50 midpoint of Ally's projected price range of $25 to $28 a share, the government -- and by extension, taxpayers like you and me -- would raise just over $2.5 billion from the sale.

And that number is likely to go higher since the government may also sell another 14.5 million shares to the underwriters of the deal -- a long list that includes other former TARP beneficiaries such as Citigroup (C), Goldman Sachs (GS), Morgan Stanley (MS), Bank of America (BAC) and JPMorgan Chase (JPM).

So it's possible that the Treasury will finally eke out a profit from Ally. That's because Ally has already paid back $15.3 billion to the government.

But Ally is too risky a stock for the average investor to gamble on for several reasons.

1) Ally doesn't benefit at all from the IPO ... other than the positive PR related to no longer being in hock to Uncle Sam.

All the proceeds from the stock sale go directly to the government. Assuming the underwriters buy the additional 14.5 million shares, the Treasury's stake in Ally will be reduced from 36.8% to 14.1%.

This is a lot different from your usual IPO. Private companies typically go public in order to raise money that can be used for "general corporate purposes" such as acquisitions, hiring more workers, purchasing equipment or simply building up a war chest of cash. That's not happening here.

2) Consider the other (questionable) shareholders.

When you look at the other shareholders that own a big piece of Ally, you can't help but wonder if they may soon head for the exits once the stock is trading.

The second-largest investor is Third Point, the hedge fund run by activist Dan Loeb. Third Point is not selling any Ally shares in the IPO, but Loeb has a history of moving in and out of stocks quickly. That was the case with Herbalife (HLF) and Yahoo (YHOO), for example.

Third Point now owns 9.5% of Ally. According to a letter to the fund's shareholders earlier this year, the hedge fund accumulated the stake during the past six months of 2013.

The other big shareholder is private equity firm Cerberus Capital Management. It owns 8.6% of Ally and you'd have to think it's really itching to finish unwinding its position relatively soon since it first invested in GMAC way back in 2006.

Owning something for nearly a decade is like an eternity for a PE firm. Also, I can't say I'd completely trust the intentions of a company that shares its name with the mythical three-headed dog that guards the gates of the underworld. Was Beelzebub Capital Management already taken?

These dogs pack a bit of a bite ... just like private equity firms

3) There's still a General Motors (GM) legacy issue. Even though GM no longer owns a stake in Ally, it still has ties to GM -- a company in recall crisis mode.

Ally offers financing for loans and leases to dealers that sell GM vehicles. That relationship could hurt Ally's loan volume if GM's recall problems eventually start to hurt auto sales.

4) IPO conditions aren't great for a company like Ally. Sure, it's been a pretty good year for certain IPOs, but a company similar to Ally that went public earlier this year has been a dud.

Santander Consumer USA (SC), the auto lending spin-off of Spanish banking titan Santander (SAN), debuted in January at a price of $24 per share. It now trades at just over $22.50.

5) Ally's fundamentals and valuation aren't encouraging.

Ally reported a net profit of $361 million in 2013, down sharply from $1.2 billion in 2012.

Even if you back out a $98 million charge tied to a settlement with the Consumer Financial Protection Bureau (CFPB) and Department of Justice (DOJ) regarding discriminatory auto loan practices for minorities, Ally still a posted steep drop in so-called core pre-tax income: from $850 million in 2012 to $606 million in 2013.

With that in mind, you'd think Ally should trade at a discount to other financial stocks. It doesn't. At a price of $26.50 a share and with a total of 481.5 million shares, Ally would have a market value of about $12.8 billion.

At that valuation, Ally would trade at 35 times last year's earnings. That's expensive for any stock, let alone a financial firm. And by way of comparison, Santander Consumer trades at just 11 times 2013 earnings.

So yes, the Ally IPO is good news for the Treasury Department and taxpayers. CEO Michael Carpenter also deserves a lot of praise for getting Ally back into good enough shape to make an IPO possible -- especially by clearing up the mess that was Ally/GMAC's mortgage unit ResCap, which filed for bankruptcy in 2012.

But that doesn't mean that we taxpayers should purchase the stock now.

Paul R. La Monica is an assistant managing editor at CNNMoney. He is the author of the site's daily column, The Buzz, and also tweets throughout the day about the markets and economy @LaMonicaBuzz. La Monica also oversees the site's economic, markets and technology coverage.